J.P. MORGAN CHASE & CO. $50 (New York symbol JPM; Income Portfolio, Finance sector; Shares outstanding: 3.5 billion; Market cap: $175.0 billion; WSSF Rating: Above average) is the third-largest bank in the United States.

In the past few years, J.P. Morgan has expanded its retail banking operations, which offsets its exposure to its more volatile businesses like stock trading. In 2003, it paid $58 billion in stock for Bank One Corp., which greatly expanded its presence in the Midwest.

In October 2006, it swapped its corporate trust business, which provides securities custody and processing services, for Bank of New York’s 338 retail branches in the New York City area. Thanks to these new assets, income from continuing operations in the fourth quarter of 2006 rose 47.3%, to $1.09 a share (total $3.9 billion) from $0.74 a share ($2.6 billion) a year earlier. These figures exclude a $622 million gain on the swap.

The increased focus on mortgages, credit cards and other consumer loans could hurt J.P. Morgan, as rising interest rates could spur a rise in default rates. So far, it is doing a good job of keeping its credit risk low. In fact, its non-performing loans fell to 0.43% of total loans at the end of 2006 from 0.56% a year earlier.

J.P. Morgan expects to complete integrating Bank One, as well as the new Bank of New York operations, and reach its goal of $3 billion in annual savings by the end of 2007. It will probably use the cash to increase its dividend for the first time in five years. The current rate of $1.36 yields 2.7%.

The stock has gained nearly 30% in the past year, but trades at just 12.5 times the $4.01 a share it should earn in 2007.

J.P. Morgan Chase is a buy.